How Sunk Cost Fallacy Can Drag You In Deeper

We usually spend our time and money on investments or items, with the unsaid expectation of reaping some benefit at the end.

However, the act of making adequate effort doesn’t automatically guarantee the best of results. If you are in a situation when you keep committing to something you have already put a lot of time, money, or effort into, and where quitting would actually be the better choice, you have likely given in to sunk cost fallacy.

The idea here is that you don’t want your effort to go waste and hope that something will change in the future.

Let’s take the example of Amit Awasthi, 37, a production manager at a multinational company in Pune. December has become a difficult time for him for the last three years as that is when he renews his endowment life insurance policy. Every year he wonders whether he should continue the policy, which he has figured has a very high premium (Rs 60,000 per year) and low coverage (Rs 7 lakh) over 15 years. But what stops him? “I feel underinsured despite paying a fairly high premium but if I close this policy now, I will not only lose the limited coverage it offers but also forfeit all the premiums I have paid so far,” he says.

Amit is putting in money to recover the sunk cost he has paid over the last three years without realising that the longer he keeps the policy, the steeper the cost will be.

Another example is when people are willing to spend large sums of money on an old car to just keep it running, even though they could save on that cost and add it to the downpayment to buy a new one or cover the first few equated monthly instalments (EMIs).

How Does It Affect You?

This bias affects all areas of life—from relationships to career and investments. You might stay in an unhappy relationship simply because you have spent years together, or continue a course or job that no longer serves you, just to justify the fees you paid. In investing, people often hold on to underperforming assets because they have already put in too much money in them. Instead of cutting losses and exploring better opportunities, they remain stuck—hoping for a turnaround that may never come.

How To Overcome Sunk Cost Fallacy?

Identify things that are unlikely to benefit you in the future, but are draining you in terms of time or money now.

Assess if it is your emotions that are making you hang on to those things or investments, rather than rational reasons.

Don’t let past decisions guide your present course of action, especially when those decisions have been erroneous.

Remember that if you have got into a bad deal, sticking to it will only spoil it further.

Realise that reallocating the future cost—money, time or effort—could actually help you recover some of the sunk cost.